Employers face many challenges when it comes to attracting and retaining qualified employees. Providing a valuable retirement package in the form of defined benefits and/or defined contributions may help an employer to garner the additional skill sets they need and entice employees to their organization.
For many employees, retirement has become known as the "golden decades". Many employees are living well into their 90s. For retirees, there are three legs to retirement income sources — social security, personal savings and employer-provided retirement plans. The need for an additional income source beyond personal savings and social security can enable a retiree to maintain a standard of living with some dignity and respect.
As a business owner, your reasons for implementing a qualified retirement plan go far beyond securing federal income tax benefits for the business. Qualified retirement plans can help your business to recruit high-quality employees, retain their services and enhance good employer-employee relationships.
When it comes to attracting and keeping good employees, a firm with a qualified retirement plan is at a distinct competitive advantage to those without these types of plans. More importantly, businesses with qualified retirement plans may deduct plan contributions off their taxes as a necessary and ordinary business expense. So in essence, through this tax deduction, the government is subsidizing your qualified plan benefit expenses.
Qualified Plans
Qualified plans, such as 401(k) and 412(i) plans, adhere to IRS regulations about eligibility, employer contributions, employee withdrawals, and withdrawal tax consequences. A company must also meet strict federal rules for nondiscrimination to ensure that the plan benefits all eligible employees.
If a company and its plan meet these provisions, the company can deduct contributions it makes to the plan; if it fails to meet them, the company risks losing its tax benefits for that year's contributions, or the plan itself may be disqualified. The company may have to file a separate tax return for the plans. Qualified plans are protected by law, so business creditors cannot access the funds to collect debts.
In profit-sharing plans, employers contribute a certain percentage of the total plan payroll.
Profit-sharing plans are one of the easiest and most basic qualified retirement plans to establish and are popular because they give the business owner flexibility in deciding how much to contribute for each participating employee annually, from 0-15% of the total plan payroll. There are different types of profit sharing plans to choose from, including, traditional age-based or new comparability.
Withdrawals prior to age 59 ½ may incur a 10% IRS tax penalty.
401(k) Employer-sponsored 401(k) plans provide one of the easiest and most effective ways to save for retirement. Contributions are automatically deducted from your paycheck and deposited into your 401(k) account. This important benefit can play a large part in helping to plan for your retirement.
Your 401(k) plan has built-in flexibility to meet your changing financial circumstances. You can increase or decrease your contributions, as your plan allows, or stop them, at any time. You choose your investments, and you have the option to transfer money among your investment options, as your plan allows.
Your contributions are deducted from your paycheck before taxes are deducted. You pay less in current income taxes than you would if you had to pay the tax first and then try to save. Plus, your earnings grow tax deferred until you withdraw your money. Tax-deferred compounding has the potential to help your account balance to grow faster than a taxable savings account, because all of your earnings are reinvested without being reduced by current income taxes.
412(i) A 412(i) plan is a type of defined benefit retirement plan. Since it is a tax-qualified retirement plan, every dollar a business owner or professional contributes to the plan will, in most cases, produce an immediate tax deduction for their company.
In a traditional defined benefit plan, benefits are funded primarily through an investment fund. The business owner determines the investment allocation and can include non-guaranteed as well as guaranteed assets.
With 412(i) plans, the benefits are funded solely with contracts issued by an insurance company. For 412(i) plans sponsored by Guardian, all plan assets are either in retirement annuity contracts or a combination of retirement annuity contracts and whole life insurance; both the annuities and the life insurance have guaranteed premiums and guaranteed benefits.
The 412(i) plan has some special incentives for small business owners and professionals. They include:
All contracts will have level annual premiums
Benefits will be guaranteed at retirement
Policy dividends* or excess earnings will reduce the plan cost
Non-Qualified Deferred Compensation
Non-qualified deferred compensation is an incentive compensation arrangement established by employers to provide retirement income and perhaps death and disability benefits to selected employees. The arrangement is a written agreement in which the employer makes an unsecured promise to make future payments to a key executive if the executive meets certain agreed upon requirements. The arrangement is a contractual commitment between an employer and an employee or independent contractor that specifies when and how future compensation will be paid. When properly arranged, the employee (or beneficiary) will defer taxation until benefits are paid at some future time.
The employer cannot deduct benefits until they are paid. A deduction can be taken in the same taxable year as the benefit is reported on the employee's income tax return.
Arrangements do not have to be pre-approved by the IRS nor are they generally subject to the regulatory requirements applicable to qualified retirement plans.
The arrangement may provide that the employee will receive future compensation as a result of a current salary reduction or in lieu of a bonus or salary increase. This is the traditional deferred compensation arrangement. In more recent times, a more popular alternative emerged: the salary continuation arrangement. Here, the employer simply commits to pay future compensation in addition to current earnings, which are not reduced by participation in the arrangement. The familiar name, "deferred compensation," is often used generically to include both types of approaches.
The employer can purchase employer owned life insurance on the life of the executive, which serves to informally fund the future payments and can allow the employer to recover the costs upon the death of the executive.
Benefits to the Executive
The executive receives a supplemental retirement benefit
The executive generally pays no tax on the benefits until they are received
Death and disability benefits can be added to the arrangement
Benefits to the Employer
The employer has the right to pick and choose the participants from their select group of highly compensated employees
Deferred Compensation is an attractive method of recruiting, retaining, rewarding and retiring valuable employees
Benefits are tax deductible when paid
The terms of the arrangement can be structured to serve the individual needs of covered employees
The employer is owner and beneficiary of the life insurance contract
The life insurance contract can provide the employer with informal funding for the benefits as well as cost recovery
Tax-Sheltered Annuities
Introduction 403(b)s are offered to the employees of non-profit organizations, such as schools, hospitals and religious organizations. The assets in a 403(b) plan are usually funded through individual annuity contracts, group annuity contracts, life insurance policies, or custodial accounts. Participants in a 403(b) plan have their own accounts, where contributions are credited and earnings or losses are realized. You can often choose the investments for your own account, and choose whether to add life insurance to your account.
Contribution Limits
The maximum contribution that you can make in 2005 is the lesser of 100% of your salary, or $14,000. If you are age 50 or older, you may also be allowed to make contributions known as "catch-up contributions." This can enable your total contribution to exceed the maximum annual limit. The limit on catch-up contributions in 2005 is $4,000 (for a total contribution of $18,000), but this limit will also increase each year until 2006 and is indexed for inflation thereafter.
The Guardian Maximizersm A 412(i) plan with recession-proff asset security.
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401(k) PLUS Sophisticated benefits at a reasonable cost, whether your business has two employees or 2,000.
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The Guardian Advantage® A funding vehicle for a wide range of qualified retirement plans, offering a broad range of investment options from well-known investment companies.
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